Question

In: Finance

You own a bond that is currently quoted at 97, has a face of $1,000, a...

  1. You own a bond that is currently quoted at 97, has a face of $1,000, a coupon of 6% and matures in 10 years. You are considering selling the bond.
    1. Should you sell it if your discount rate is 7%? Explain.
    2. Suppose the bond is quoted at 89. Should you sell it? Explain.
    3. What is the lowest price for which you would sell the bond? Explain

***Please provide excel formula breakdown if you can please *****

Solutions

Expert Solution

Face Value       = $100
Coupen Rate    = 6%
Coupen Amount   = 100*6%
6
Maturity     = 10 years
Discount Rtae    = 7%
PVAF(7%, 10 years)   = 1/(1.07)^1 + 1/1.07)^2 + 1/(1.07)^3……………. 1/(1.07)^10
7.023582
PVF (7%, 10) 1/(1.07)^10
0.508349
Price of bond = 6* 7.02358 +100*.5083
$92.98
A) Price of the bond here quoted is 97 it is over priced hence we will sell the bond at 97 at 7% discount rate
B) If the Bond is quoted at $89 the price of bond is less than what we have calculated hence we wont
Sell the bond because it is underpriced in the market
C) Lowest price which we sell the bond is what we have calculated above that is 92.98

Note : here in the question it is assumed that face value of the bond is mistakenly quted as 1000 , it is taken as 100, or if the face value is 1000 then the price of the bond will become as $ 929.76 and change the answer accordingly  


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